How airlines are cutting fares to offset the weak economy and boost demand

Airlines in Canada and around the world are using discounted airfares to stimulate demand, trading fuller planes for lower yields as the economy weakens.

Air Canada and WestJet Airlines Ltd. reported strong load factors in January, with both airlines filling 80.1 per cent of their available seat capacity last month.

But strong load factors don’t necessarily translate to a strong bottom line if the airline has to cut ticket prices to fill seats. This results in lower yields, or the average fare paid per passenger, per mile flown.

On a global basis, the International Air Transport Association (IATA) said 2015 was the strongest year for global passenger traffic since 2010, largely as a result of lower ticket prices.

The volume of passengers carried by all airlines rose 6.5 per cent year-over-year, with load factors hitting a record annual high of 80.3 per cent. Airfares, meanwhile, fell five per cent after adjusting for the higher U.S. dollar.

“While economic fundamentals were weaker in 2015 compared to 2014, passenger demand was boosted by lower airfares,” the association said in a statement.

WestJet, in particular, has been struggling to adjust to the impact of Alberta’s oil-price-fuelled slowdown, which CEO Gregg Saretsky described as “sudden” and “deep” on a conference call this week. About 25 per cent of the airline’s business originates in the province.

Related

WestJet Airlines Ltd bruised by ‘sudden, deep’ slowdown in Alberta as it braces for more blowsU.S. looks to Canadian model as it debates air-traffic-control privatization

This has forced WestJet to discount ticket prices to stimulate demand as it works to shuffle some of its planes to other regions, like British Columbia and Ontario, where the economy is healthier.

By the third quarter of 2016, WestJet expects to have reduced its capacity in Alberta by five per cent compared to a year earlier, but in the meantime it will have to keep offering seat sales to generate demand, Saretsky acknowledged in Tuesday’s call.

The CEO said he expects yields to fall about seven per cent in the first quarter as a result of lower fares, but added that the discounted routes will remain profitable.

“The discounting, while it’s taking yields and unit revenue performance down, is still generating profits, so none of what we’re doing is generating losses,” he said.

“We are trying to move away from being on sale as much as we are, and as capacity moves out (of Alberta) I think you’ll see that change.”

In the meantime, WestJet shouldn’t waste too much time worrying about yield or revenue per available seat mile (RASM), said airline consultant Robert Kokonis.

“I think it’s better to fill some of the seats at a price that’s still above break-even and buttress their top line and worry about RASM and yield once things recover,” said Kokonis, president and managing director of Toronto-based AirTrav Inc.

Air Canada will report its fourth-quarter and full-year results on Feb. 17.